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Embracing Risk July 27, 2009

Posted by Jason in Insider's View Relapses.
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The latest big news in the healthcare industry has been the recent law providing for Food and Drug Administration regulation of tobacco as a drug. While it may not affect you directly, the law of unintended consequences is likely in full effect here, and it remains to be seen just what the eventual outcomes will be. Aside from the legislation itself, however, we can observe how a high-profile organization has attempted to shift government regulation—normally considered something of a risk—into more of a marketing tool.

One of the interesting side-acts of the political process has been Philip Morris’ support of the new law. While the nation’s largest tobacco company surely will need to make some expensive changes to manufacturing and marketing—leading some to question the company’s rationale—the conventional wisdom is that the law will end up protecting its existing market share. Irony aside, this should be a lesson for any industry that experiences risk due to government regulations that are influenced by countless outside forces. Engineering just happens to be one of those industries, and we should heed the real-time example of this influence at work.

Think of all the various codes, regulations, and guidelines that govern your professional work. Where do they come from? Legislators rarely have the breadth of technical knowledge to develop most of these standards; often, independent organizations create them, prior to their being incorporated into various statutes. The tobacco effort has seen the American Cancer Society, American Heart Association, and American Lung Association send fact sheets to Capitol Hill to educate lawmakers and influence the final outcome.

Similarly, AIA, ANSI, ASTM, AASHTO, and countless others provide technical information that helps shape standards against which future work will be measured. Herein lies the lesson. By and large, new regulations are designed to maintain some degree of the status quo. Occasionally, however, laws are implemented that seek to advance technology (albeit with more stick than carrot), such as those regarding fuel efficiency, renewable energy, and emissions standards.

Looking ahead, more changes are around the corner in the effort to promulgate regulations governing green building. In July 2009, the California Green Building Standards Code went into effect. This code requires the equivalent of a LEED Silver certification for all new construction in the state. Nationwide, cities and counties are eager to show that they are on the forefront of environmental awareness as well, and many are beginning to consider enacting similar regulations for private and public structures.

If your firm hopes to capitalize on this market, think back to the tobacco story. If you are not talking to your city, county, state, and federal representatives about these and similar issues, your trade groups and competitors are—and they are not doing it specifically for your benefit. All of these regulations and guidelines are surely intended for the public good, but few firms engaged in promoting such standards are doing so for charity. If your firm supports them, it is a fair bet that part of the motivation is to protect your existing market share, a la Philip Morris.

Undoubtedly, the green market has a high profit potential. Those “early adopters” who develop standards and market them to their government customers do so in part to protect their own business from outsiders. By instituting regulatory guidelines, the barrier to entry for new firms is raised that much higher. Intentionally or not, such new regulations will favor the early adopters, and of course will reflect any influence that they may have had on the process. Are you prepared to accept the consequences of accepting regulations as risks—uncontrollable external events to which you must react—or are you positioned to influence them to reflect your specialized technical knowledge?

“In a free market, your reward is a function of how much you contribute to the economy; in a regulated market, of how much you contribute to politicians.” —William Baldwin

— from Insider’s View, July 2009

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